Wednesday, October 9, 2013

HuntBlog Legal and Market Review

8 October 2013

Supermarket Duopoly and Foreign land Acquisition


          The National Party have put forward concerns about Australia' supermarket duopoly and the acquisition of Australian farming land and agri-businesses by overseas state-owned and state funded companies front and centre in their platform for resurrecting the fortunes of Australia's rural industries.

          This review sets out the background to the duopoly and foreign investment debate and explores some of the issues involved.



Australia’s Supermarket Duopoly

The Problem

The National Association of Retail Grocers of Australia’s (NARGA) public submission to the ACCC, enquiry into the competitiveness of retail prices for standard groceries in 2008, amongst other things noted that;

* Australia with a then population of only 21 million people had the most concentrated retail grocery sector in the world quoting an ACNielsen 2003 assessment giving Woolworth and Coles 79% of the national market for branded packaged groceries, whilst

* the UK Competition Commission had found that the concentration of the United Kingdom grocery industry where five chains controlled 80% of a market of 60 million people had resulted in an adverse effect on competition, and

* that the Australian supermarket duopoly had increased grocery prices and profits significantly ahead of OECD averages and ahead of the Australian consumer price index for the previous decade, regardless of periods of drought, and that

* during the same period, product ranges had been reduced with private player brands being deleted and replaced by house brands( often imported ) owned by the supermarket chains, consequently reducing the scope for product innovation and true competition, and

*that hyper– concentration in a market reduces competition and leads to market sharing, and

* growth in market share by Woolworths and Coles between 1974 and 2006 which coincided with the operation of the Trade Practices Act 1974 demonstrate that the legislation had been ineffective in preventing the hyper- concentration of the Australian grocery market,

* as a consequence of limited competition in Australia’s grocery sector indexed farm gate prices generally (and  farm gate milk prices in particular) -for the period 1992 2005- had fallen well below both the retail milk price index and the CPI index.



    







As John Carter advised during our post tree planting lunch at Robertson; Australian cattle producers receive less than 25% of the consumer dollar for their cattle whilst US producers are currently receiving 47%. The lamb, pork, chicken, egg and horticulture producers can all recount similar statistics.


How the Problem Arose

As the NARGA 2008 submission to the ACCC points out, much of Woolworths and Coles duopoly dominance has come about as a consequence of creeping acquisitions.

Coles set the ball rolling towards supermarket duopoly in the 1980s by buying up a myriad of small grocery retailers following the watering down of the merger provisions of the Trade Practices Act in 1978.

Coles progress stalled in 1994 when the Trade Practices Commission (the precursor to the ACCC) prevented Coles and New Zealander Graeme Hart from taking over Franklins Australasian assets.

Later however, Woolworths was permitted to acquire one third of Franklins 200 retail stores in 2001 and 21 prime stores and sites in Western Australia from Foodland in 2005 and the toleration of Woolworths acquisition of Dan Murphy’s in 1998 and of a LH Hotel group in 2004 facilitated a quantum leap into the future domination of liquor retailing. The acquisition of petrol stations with tied  supermarket loyalty card incentives followed and Coles are now seeking to obtain a banking license so it can and compete in the housing finance market.

The Remedies

The High Court found in Boral Besser Masonry v ACCC [2003] the that uncompetitive “market power…. Is absence of constraint from the conduct of competition or customers “

There are many, including NARGA, who think that Woolworth and Coles  80% of market share of the grocery market effectively allows them to act with impunity in exercising market power unconstrained by the conduct of suppliers, competitors and customers, raising retail prices in order to increase profits and satisfy the share market’s expectations of growth quarter on quarter, year on year.

The jury is still out on the measures that need to be taken to address Australia’s hyper -concentration of grocery supermarket power.

The debate seems to be down to whether the answer lies in:
* strengthening section 50 and section 81 of the Consumer and Competition Act (CCA)which was formerly known as the Trade Practices Act, which provides the Court with the general divestiture power to stop acquisitions of shares or assets which are likely to have the effect of substantially lessening competition in an Australian market and the court’s power to undo any such acquisition,and/or

* strengthening section 45 of the CCA that out laws contracts and arrangements that lessen competition and section 46 of the CCA to prevent monopolies frommisusing their market power for the purpose of damaging competition.

The Federal government has announced a root and branch review of Australia’s anti-competition laws and review of sections 45, 46,50 and 81 of the CCA should be front and centre to that exercise.

Divestiture

Many of you will recall that Australian Meat Holdings (AMH) was forced by the Federal Court to divest itself of the Bowen and  Mackay abattoirs  in the late 1980s after AMH’s Australia’s Bicentennial celebration attempt to ”buy back the farm“ by acquiring the whole of the issued capital of the English owned Borthwick& Sons( Australasia)Ltd because the Federal Court upheld the Trade Practices Commission submission that AMH had placed itself in a position, or would be likely to be in a position, to dominate the fat cattle market in northern Queensland.

Ironically, many of you will also be aware that AMH was eventually taken over by the Brazilian owned (and partly Brazilian government owned)company JBS Swifts who are the largest meat processors in the world.

Following the JBS takeover of the Tasman Group for $150m in 2009,and its Tatiara Meat Company for $30m in late 2009 and ACCC approval for its $36m takeover of Rockdale abattoir and feedlot for $36m in 2010 -JBS control 25% of Australia’s meat processing capacity and about 30% of Australia’s feedlot capacity - a far higher percentage of the Australian beef processing industry than AMH enjoyed prior to being ordered to divest itself of the Bowen and Mackay abattoirs 20 years earlier.

The AMH case possibly represented the high watermark for divestiture orders in Australia with Section 50 of the Trade Practices Act being watered down by amendment in 1992 to require not only proof that the company in question be in a dominant position in the market but that that the company had used a dominant position to substantially diminish competition within that market.

The power of section 50 was also further eroded by subsequent amendments to the Trade Practices Act in 2010 and 2011.

Anti-monopoly divestiture powers, perhaps unfortunately, have generally been sparingly used in Australia and overseas.

Notable exceptions being:

* the Standard Oil case at the beginning of the last century in the United States when the US Supreme Court ordered that Standard Oil be broken up into 34 independent businesses and the  AT & T consent order break up into seven regional carriers in order to end long-running litigation in the late 1980s, and

* the 2009  orders by the United Kingdom Competition Commission recently for BAA Airports to divest itself of Gatwick, Stansted and either Glasgow or Edinburgh airports.

The United Kingdom Competition Commission’s power to order divestiture is unique in that, unlike the situation in the US, EU, Canada and Australia, the divestiture sanction is used by the regulator rather than the courts and there is no requirement for a finding of illegal conduct as such. However, the UK Competition Commission can make divested share orders if the market structure under examination has features which give rise to a adverse effects on competition.

Abuse of Market Power

Sections 45 and in particular 46 of the Trade Practices Act (now known as the Competition and Consumer Act) have proved to be controversial provisions since their enactment.

Recent High Court decisions have been criticised by small business for placing too great an emphasis on the role of section 46 in promoting and fostering competition, without giving due care to the primary aim that large corporations do not abuse their market power for the purpose of damaging competition

The difficulty with section 46 is deciding when healthy competition, and aggressive competition cross the line and become anti-competitive.

Similar to the Trade Practices Act, divestiture powers and the abuse of market power provisions have been watered down by the courts over the years.

The first relevant case involved Safeway Stores Pty Limited, a subsidiary of Woolworths, which was decided in 2003. In this case, the ACCC took action against Safeway for alleged contraventions of sections 45, 46 and 47 of the then Trade Practices Act. The ACCC argued  that Safeway had misused its market power by ceasing to sell George Weston’s bread because a number of Safeway’s competitors had begun selling this plant baker’s branded bread at discounted prices.

The Court upheld the ACCC argument finding that:
“Safeway’s conduct was materially facilitated by the existence of its market power even though that same conduct would not have been absolutely impossible without that power“

The Court concluded that:
Safeway’s conduct was only rationally explicable as the use of leverage it had in the market to inflict pain on the plant baker concerned and thereby desolated from continuing to supply discounted bread to Safeway’s local competitor”

Conversely on 10 September 2013, the Federal Court handed down judgment in the ACCC v Cement Australia case making interim declarations that the defendants, which included Cement Australia had not engaged in contraventions of the misuse of power provisions of section 46 of the Trade Practices Act. However, the Federal Court did find that Cement Australia and one of its officers actions had constituted a contravention of section 45 of the Act which outlaws contracts or arrangements that lessen competition.

The ACCC had alleged that Cement Australia had a substantial degree of market power in the market for concrete grade fly ash in South East Queensland and had taken advantage of that market power for the purpose of locking out competitors. Fly ash is a by- product of coal-fired power generation. Certain grades of fly ash can be used as a partial replacement for cement in the manufacture of concrete. The ACCC’s section 46 case was essentially a predatory bidding case.

It is alleged that Cement Australia used market power during a fly ash tender process in order to win exclusive supply of a product and foreclose competitors.

The ACCC case against Cement Australia had been a key platform in the ACCC campaign to pursue high profile misuse of market power cases.

The reasons for the Courts decision in the Cement Australia case have yet to be published but legal commentators suggest that the interim declarations make it difficult to draw any conclusion other than that the ACCC has lost yet another section 46 case.

Section 46 of the CCA and the Cement Australia case are expected to be a key focus over the coming review of the CCA.


Selling the Australian Farm to Foreign State-Owned Enterprises

New Federal Agriculture Minister Barnaby Joyce has called on all those that are concerned about the sale of Australian farm land and assets to foreign state-owned enterprises to make as much noise as possible to help him introduce legislation to stem the tide.

The “noise” is gradually getting louder.

The Problem

Over the last few years there has been growing unease about global food shortages which has made Australia and areas of South America, Eastern Europe and Africa prize targets for foreign government aided enterprises and private investment groups from China Southeast Asia and the Middle East who are attempting to secure their food supply for the future.

The recent ABC TV program the SuperSized Earth reported that the amount of food produced in the world has trebled in the last 50 years and is expected to double again within the next 50 years, and that currently  40% of the world’s land mass is used for food production.

There are increasing reports that after food prices spiked in 2008 that China, India South Korea, the Gulf States and western European corporations began securing tracts of land in Africa and South America and Australia.

It has also  recently  been reported that the Ukraine has agreed to a deal with a Chinese company to lease up to 9% of its land (which represents 3,000,000 ha of prime black soil Ukrainian farmland) for 50 years in order to feed China’s burgeoning population. Apparently the leased farmland will be cultivated principally for growing crops and raising pigs with the produce to be sold at preferential prices to Chinese state owned conglomerates.

In 2011 the then National party agriculture spokesman, John Cobb, introduced a motion into Parliament calling upon the Australian Bureau of Statistics to collect data on foreign ownership of agricultural land and agribusinesses stating that:”we must avoid situations where foreign owned farms are being granted access into markets that are denied to a stone and produces or where Australian farmers and investors are being priced out of the market.”

The argument put forward by John Cobb and the National party was that if foreigners buy up our farmland or agribusiness firms they will undermining  our food security by selling our food cheaply to their own countries, leaving us without food for ourselves and depriving us of the profits.

In June 2011, The Australian newspaper reported that a Chinese government controlled mining giant had spent $213 million buying up 43 farms so that it could explore for coal near the NSW township of Gunnedah, noting that the Chinese coal giants’ spending spree had slipped under the FIRB radar as the Treasury unit only investigated investments totalling more than $230 million.

In February 2012 Jane Hansen from the Telegraph ran an article under the headline Australia is the Great Foreign Owned Land as more NSW Farms being Sold Overseas.

The article went on to refer to foreign countries “secretly“ buying up large tanks of NSW farmland by establishing shelf companies, trust funds and extended settlements to avoid scrutiny. The Telegraph claimed that more than 800,000 ha of prime fertile land from more read in the North to Deniliquin in the south is now being foreign owned with Korea’s HoMyoung Farm company the largest stakeholder with 500,000 ha.

The Telegraph article went on to refer to the fact that under current legislation only purchasers of agricultural land over $244 million triggered an FIRB review, whilst most farms in NSW sell for between $500,000-$10 million.

During the election campaign Tony Abbott promised to reduce the threshold for consideration of farmland to foreign buyers by a third on the question of whether or not such a sale was in the national interests from $248 million to $15 million.
    
In January 2013 the Australian newspaper reported that Australia’s most valuable farm, Cubbie Station, had been sold to a company the  majority of which was controlled  by foreign-owned Chinese textile maker and the sale of Cubbie Station for $240 million had received approval from the  Federal Treasurer on the eve of Australia Day

A $240 million sale price that the outgoing Cubbie chairman and former Queensland Treasurer Keith De Lacy described as a steal for the Chinese investors.

Under the terms of the foreign investment deal ticked off by Treasurer Wayne Swan, the Chinese Textile company agreed to reduce its 80% stake in Cubbie Station to no more than 51% within three years.

In January 2013 then National’s Senate leader Barnaby Joyce described the sale of Cubbie Station to the Chinese textile maker company as “bitterly disappointing.”

In July this year ABC presenter Leigh Sales reported on China’s biggest state and agricultural conglomerate investing $150 million to buy up vast tracts of farmland in Western Australia as well as port facilities in Albany to ship its grain out of the country.

In September this year new agricultural Minister Barnaby Joyce publicly stated that the Indonesian government’s intention to acquire Australian Top End cattle properties in order to secure the supply of cattle to Indonesia’s feedlot industry could not be in Australia’s “national interest.”

An article in last week’s Beef Central suggested that whilst the Indonesian government had announced acquisition plans to secure a reliable supply of beef to meet the future demand of its large and growing population, the real and substantial interest was coming from the Indonesian private and one of Indonesia’s largest integrated agri-businesses, JapfaSantori. JapaSantori has recently purchased the 40,000 head carrying capacity cattle properties Inverway and Riveranin the Northern Territory’s Victoria Downs with a total from the Underwood family.

The decision by the new Treasurer Joe Hockey on whether to approve the takeover bid by the US-based food company Archer Daniels Midland (ADM) for Australia’s largest listed agribusiness GrainCorp,which the Treasurer has said will be made by 17 December 2013, is generally regarded to be a decision that will send out a major signal about the Coalitions attitude to foreign investment.

The Coalition’s Response

Warren Truss and senior Nationals have gone out on a limb in voicing their opposition to the ADM takeover. In June this year Warren Truss warned that “This sale would mean that every grain export facility in Queensland, NSW, SA and all but half of one in Victoria, would be foreign-owned. The takeover would hand ADM 280 storage sites in the eastern states, 19 grain trains, three container loading facilities and vital stocks information ADM is not offering new investment or any new commitments to Australia – just new owners at above market value. What is this deal for Australia? Grain storage and handling charges would rise from farmers to pay for the purchase and the profits would be transferred to the new American owners “

Senator Nash told the Fairfax media that “[This bid for GrainCorp] is absolutely without doubt contrary to the national interest and Hockey should reject it”

The GrainCorp foreign takeover decision by Treasurer Hockey, which he has been promised by 17 December this year, will be the first litmus test on the reported policy rift between the Liberal party and the National’s on foreign ownership of Australian farmland and agri-businesses.

The reported rift between the nationals and the Liberals on this issue may not, however, be as wide as many suggest.

Liberal, Senator Heffernan who leads the Senate rural and regional affairs committee that has been investigating whether purchases such as the Chinese state-owned agricultural conglomerate in Western Australia are in the national interest is on the record as stating “it would be a great pity if Australia’s farmers ended up as tenants and tenant farmers and unlike the prospect of capital growth to hand on to the family, only have a job to hand on and I guess there’s a warning there”

The source documents for this newsletter can be viewed on the documents links at  www.huntblog.com.au



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